State-owned car company will take over smaller producers

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A model poses with a Chinese-made Changan Leimeng van at the Auto China 2004 exhibition in Beijing, China. Changan Automobile Group plans to take over the auto assets of Aviation Industry Corp. of China in one of the biggest deals in recent years in China's auto industry.

BEIJING — A state-owned Chinese automaker announced Tuesday it will take over several smaller producers amid a government effort to build up bigger domestic car companies that can compete globally.

Changan Automobile Group said it will take over the auto assets of Aviation Industry Corp. of China, which will in turn receive a 23 percent stake in Changan. They include two Chinese brands and joint ventures with Suzuki and Mitsubishi.

"That's pretty significant," said John Bonnell, an analyst for research firm J.D. Power and Associates. "It's a step toward what they're trying to get done."

Financial terms were not released, but state news agency Xinhua said the deal was one of the biggest in recent years in China's auto industry.

Beijing is attempting to orchestrate mergers among China's dozens of small automakers to create big, efficient producers. But progress has been slow and the effort faces opposition from leaders of city or provincial governments that own car makers and are reluctant to see local producers close.

A government plan released this year calls for building up two to three large Chinese automakers with annual production capacity of 2 million vehicles. It is part of official ambitions to create globally competitive Chinese companies in industries ranging from finance to telecommunications.

China's auto sales are the world's highest this year and the country has dozens of domestic automakers. But domestic brands are small, while the country's biggest producers are General Motors Co. and Germany's Volkswagen AG.

Sales in October soared by 72 percent from a year earlier to 1.2 million vehicles, the state-sanctioned China Association of Automobile Manufacturers reported this week. Total sales so far this year are 10.9 million vehicles, compared with 8.6 million in the United States, according to Autodata Corp.

Chinese automakers export to developing countries in Asia, Latin America and Africa and some have established factories abroad. But none has been able to meet more demanding U.S. safety and environmental standards.

Changan is China's fourth-largest automaker, with sales so far this year of just over 1 million vehicles and an 11 percent market share, according to J.D. Power. The acquisition of Harbin Hafei Automobile Industry Group, Jiangxi Changhe Automobile and the Suzuki and Mitsubishi ventures would boost it into third place, with a strong presence in small commercial vehicles, a popular market segment.

AVIC is better known as a top Chinese military contractor. It has a growing commercial aerospace business and is leading an effort to develop China's first jumbo jet. Getting rid of its auto assets would allow AVIC to focus on aerospace.

The Changan acquisitions are the first major move in the industry since state-owned Shanghai Automotive Industry Corp. and Nanjing Auto Group agreed in 2007 to combine their production assets. SAIC is the local partner of General Motors Co. and Volkswagen AG, while Nanjing Auto is best known for having acquired Britain's MG brand.

Despite Beijing's desire for consolidation, the process is moving slowly because mergers require companies and local leaders to cooperate, said Yale Zhang, an analyst for CSM Worldwide in Shanghai.

"It's like marriage: You have to find a woman and a man who are willing to marry. Then your friends or parents can push a little," Zhang said. "But if they don't want to, then the push is useless."

"There will be more and more mergers, for sure," he said. "But on a larger scale, especially in passenger cars, it will take some time, because the passenger car sector is much more diversified."

The industry probably has to suffer a sales slump that forces more mergers before major competitors can emerge, Bonnell said. He said the latest J.D. Power forecast through 2015 does not foresee major Chinese exports.

"It's still a slow pace of consolidation," he said.

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